Click here for search results

The architecture of the Wealth Estimates

Measuring capital stocks is a complex task. Capital can be valued using two basic methods:

• It can be valued as the sum of the additions, minus the subtractions, made over time to an initial stock—summing up the value of gross investments and subtracting depreciation of produced capital, for example.

• Alternatively, capital can be valued as the net present value (NPV) of the income it is able to produce over time. This is what an investor would be willing to pay for a capital good.

As a practical matter we employ the first method, also called the perpetual inventory method (PIM), to estimate the value of produced capital stocks, while the second method is used to value stocks of natural resources. The figure represents the steps in estimating wealth components.

Wealth Estimate Architecture

Produced capital is the sum of machinery, equipment, and structures (including infrastructure). Urban land is not considered to be a natural resource, and so is lumped in with produced capital in the wealth estimates. The value of urban land is calculated as a percentage of the value of machinery, equipment, and structures.

Natural capital is the sum of nonrenewable resources (including oil, natural gas, coal, and mineral resources), cropland, pastureland, forested areas (including areas used for timber extraction and nontimber forest products), and protected areas. The values for nontimber forest resources and protected areas are estimated only crudely. In the case of nontimber forest products, world average values of benefi ts per hectare, distinguishing developed and developing countries, are applied to a share of the country’s forested area (values are derived from Lampietti and Dixon 1995). Protected areas are valued using country-specifi c per-hectare values for cropland or pastureland (whichever is lower). This severely undervalues the Serengeti Plain, for example, but possibly overvalues some of the Arctic parks. As noted above, most natural resources are valued by taking the present value of resource rents—the economic profi t on exploitation—over an assumed lifetime. While forests can, in principle, yield benefi ts forever if sustainably managed, we account for overexploitation by calculating the effective lifetime of the resource given current harvest rates.

The next step is the measurement of total wealth. Measuring total wealth as the sum of its components makes intuitive sense, but this is limited by data and methodological constraints. We have few good tools for valuing human capital, for example, and even fewer for valuing social or institutional capital. In other cases, such as fi sheries, we simply lack data. The alternative is to rely on economic theory, which defi nes total wealth as the net present value of future consumption. We therefore measure total wealth by assuming a future consumption stream and calculating the net present value in year 2000. However, some countries have unsustainable levels of consumption, which is signaled by negative net or genuine saving levels (see chapter 3). In these cases consumption is decreased by the amount of negative saving in order to arrive at a sustainable level of consumption.

Intangible capital is calculated as a residual, the difference between total wealth and the sum of produced and natural capital. Since it includes all assets that are neither natural nor produced, the residual necessarily includes human capital—the sum of knowledge, skills, and know-how possessed by the population. It also includes the institutional infrastructure of the country as well as the social capital—the level of trust among people in a society and their ability to work together toward common goals. Finally, the residual includes net foreign fi nancial assets through the returns generated by these assets. For example, if a country is a debtor, then interest payments on the foreign debt depress consumption, reducing total wealth and therefore the intangible residual.


Permanent URL for this page: